When France declared war on Germany in September of 1939, nothing really happened for awhile. What followed was nine months of “sitzkreig,” a sitting war, or as the French called it, la drole de guerre, the phony war. By May of 1940, that was all over; the world changed in a hurry, leading to outcomes that would re-draw the map that characterized the second half of the 20th century.
It’s worth wondering if we’re in a similar pregnant pause in the U.S. online gaming market, which is definitely on the road to somewhere, destination not quite known, but with the potential for fundamental change always lurking in the background. Yes, Nevada has started to issue online gaming licenses, but a state with 2.7 million residents limited to playing online poker really isn’t going to transform much. Other states, notably New Jersey and Delaware, are next, but the absence of a federal law or, perhaps more important, the legalization of online gaming by a major population state, progress will be slow. Under the surface, however, there is plenty of ferment and the potential for change whose exact character is difficult to predict.
“There has been a lot of positioning, not posturing, which is a head fake,” said Steve Rittvo, chairman, The Innovation Group. “Web sites are being built and tested; marketing strategies are being looked at. But the bigger states, most notably California, aren’t there yet.”
“A lot of people felt like they had to do something quickly last year because they felt there would be federal legislation and they needed to be in a position to react,” said John Connelly, vice president, business development, Bally Technologies. “You had a lot of acquisitions, investments, partnerships. Quite frankly, I think a lot of those moves, if federal legislation had happened, would have benefitted those companies greatly. Now that it hasn’t happened, and the industry itself is taking a deep breath and asking what exactly is going to happen here.”
POLITICAL FOOTBALLBy mid-September, reports of what might constitute federal online poker legislation had surfaced, but the real questions don’t surround a potential measure per se, but how the votes might be assembled for it. The emergence of an anti-Internet gaming plank on the Republican Party platform during its convention in early September signaled just how challenging that endeavor might be.
“Right now, in order for anything to move, you’d have to free up something on the Republican side,” said Dennis Ehling, partner, Blank Rome, LLP. “There are not enough Democrats to carry it on the Senate side, let alone the House. The RNC (Republican National Committee) plank opposing any expansion of online gaming is a strong signal to Republican legislators not to do anything between now and the election. Presuming that we have an election and there’s no change of control, at the White House, House or Senate levels, there’s probably a very small window for a bill to get done. But if there is any change in composition, then I would say there’s no way a lame-duck session will get anything done.”
For sake of argument, if Mitt Romney wins or the Republicans take over the Senate, any Republican would be hard-pressed to cross party lines and join forces with Harry Reid on a controversial issue, Ehling said. “If things stay the same and we’re looking at four more years, or at least two more years, of the current system and you have legislators who are retiring and aren’t concerned about hearing from RNC leadership or others who may be anti-gambling, then you might get to see just enough movement to get something done,” he said.
Ehling surmised that Internet gaming “came in largely as a pet issue. I don’t think that really religious conservatives are ruling the day with the RNC this go-round. It’s more whatever it takes to focus on the economy. I didn’t sense any particular urgency to make this an issue in the campaign. It’s very hard in an election season for someone to make a vote against something in the platform on either side of the aisle. It’s not an issue that 85 percent of Congress may even care about.”
Many hope that online gaming, given the lack of intensity it generates among many in Congress, can be attached by the Senate to a must-pass bill that would ride it along with the fiscal cliff legislation, but, as Ehling points out, you can’t do that if you don’t have enough support on the House side as well. Revenue bills are initiated in the House and then passed onto the Senate, where they could add Internet gaming to the bill and then it works its way through the conference committee. “You have to have at least some leadership support in the House which would come from having enough Senate Republican support,” he said. “What we’ve heard is Senator Reid is trying to get his junior Senator (Heller) to rally the troops, but that hasn’t really taken root yet.”
With the federal outcome up in the air, attention has been focused on the state level, particularly California, with its population approaching 38 million people and, on its own, the eighth largest economy on earth. A bill that was limited to legalizing online poker died in committee in Sacramento last month, and the positions that were articulated during its discussion suggest that passage isn’t just around the corner in the Golden State either. “There is really a divergent opinion as to whether Internet gaming is a good thing for the existing industries,” said Ehling, who is based in Los Angeles. “I think the lack of a consensus really made it difficult to move forward.”
The players in California start with the state’s gaming tribes, which are not united around any one position; over 90 card clubs, which typically have strong political connections to their local government because they have to be permitted by them, giving that card clubs, “arguably more political clout than they might otherwise have,” said Ehling; horse racing interests, which include traditional tracks, satellite wagering and online advance deposit wagering companies, “they each have their own interest which is generally to not be left behind in anything,” Ehling noted; and social gaming companies such as Zynga, which in August hired Maytal Ginsburg Olsha, 888’s former senior vice president of corporate and regulated markets and was reported to have invested lobbying funds in California to gain access to the state’s online poker market should one be created.
With the bill dead at least until the next legislative session in January, what is the potential for revival? “What drove the conversation in California was a fair amount of discussion of it being a positive contributor to the state’s budget woes; part of the energy for it died down when the budget, such as it was, passed,” said Ehling, who noted there are two competing referendum that will actually raise taxes on the ballot next month. “If neither is approved, legislators will have to come back and completely re-jigger the budget again and cut out a bunch of things that they’ve agreed to cut. If they have to go into scramble mode again for the budget, it could be another impetus to push Internet gaming forward.”
California is worth focusing on not only for it huge potential as a market, but because the challenges it faced in assembling a compelling online gaming measure that was supported both by its existing gaming industry and the state’s constitution. “Originally, there was a thought to license something broadly, but California has a constitutional prohibition on licensing casino-style gaming,” said Ehling. “So while there may be some interest on the part of some lawmakers to do something broadly, it runs headlong into the constitutional issue, which would make it very difficult for anyone other than the tribes to do anything other than poker.”
Limiting online markets to poker is another aspect of the U.S. online market that is giving operators some pause.
“Now that they’ve slowed down and thought about this and done the analysis that you would normally do when you have the time, quite frankly poker is not where the majority of the money is being made by these international operators,” said Bally Technologies’ Connelly. “Five years ago, the rake was 15 percent and the cost to keep a player loyal to you was about £100. Fast forward to today and the rake is around 5 percent and it can cost £3,000 to retain a player. The bottom line profitability of poker is not attractive for a lot of these companies (£1 = US$1.62). The majority of profit is coming from the casino side, which is slot play and table games.”
POSITIONING FOR THE FUTUREThe political grind notwithstanding, U.S. operators and suppliers are moving ahead on multiple fronts in the online sector. “Here in the U.S., there is a huge level of interest in interactive gaming from land-based operators,” said Robert Melendres, executive vice president of emerging businesses, International Game Technology (IGT). “These operators, quite rightly, want to secure their business into the future, and cover all distribution channels which are legally available to them. As online gaming becomes available, at either a state or federal level, IGT is well positioned due to our extensive online casino gaming and regulatory experience. But even before any such legislation, IGT is offering its casino customers an online casino social gaming offering that allows casinos to offer poker and other casino games to their players now.”
Melendres notes that, according to SuperData, an online games research firm, in less than 12 months, the social casino game market has grown to $1.6 billion worldwide, making it one of the fastest growing social game genres. “With social gaming, there is legal play that can happen today, not tomorrow,” he said. “Recently, we introduced the IGT/DoubleDown casino partnership program, which allows casino operators to embed the DoubleDown Casino site onto their Web site while seamlessly delivering reach, retention and revenue to the operator. This program has already proved to be very popular and IGT has partnered with casinos across the country as we launch this new online gaming initiative. We continue to sign new casino partners each week.”
IGT currently offers land-based titles Cleopatra and Da Vinci Diamonds through DoubleDown Casino to its casino customers and to players on Facebook, and “there are many more to follow,” Melendres said. “These titles are already among the most popular games on DoubleDown. Multi-player Poker is also available, and DoubleDown now has the third largest free-play poker site in the world.”
Playing off its strengths as a systems-oriented company, Bally Technologies’ approach was to “look at the platform before anything,” said Connelly. “If you can’t deliver the technology in a secure, reliable fashion, you’re dead. Our systems are designed to be open and to allow for easy integration, allowing operators to control decisions that affect their businesses. Our role is to query this data and provide tools to data mine and maximize revenue the data can provide to the casino floor.”
When looking at the online business, Bally was committed to create a paradigm shift to allow the industry to have a more open and secure approach to the market than was typically the case in Europe. “We wanted to give operators the flexibility needed to choose best-in-class content, control and protect their own data in a fashion that they were accustomed to in the traditional gaming world,” said Connelly. “We came across Chili Gaming which had demonstrated that they had interfaced historically to many different online companies, while having an approved platform in France, one of the most highly regulated jurisdictions in the world at that time. They had developed a best-in-class solution that aggregated content. We felt that with our infrastructure at Bally, with close to 2,000 engineers worldwide, we could provide a platform that was open, allow choice of best-class-content, store that content on their server where they controlled the information that they were generating, and provide a common e-wallet that they also controlled to allow them to integrate all of these different types of applications. We want to integrate with the casino floor.”
The traditional casino operator has a significant advantage over an online operator who lacks that core infrastructure, said Connelly. “About 85 percent of online players have never been to a casino. If you have the ability to integrate your online casino with your traditional casino, you now have the ability to attract new players into your traditional casino. The profile of online players is similar in many ways to that of a traditional casino player. Whether it’s social or online, there is a fundamental synergy with the casino industry. There is a huge demographic that likes to play casino games. If you are able to incentivize the online player to visit the traditional casino floor, the potential could be massive. Instead of cannibalizing traditional casinos, it can actually augment brick-and-mortar traffic in a significant way.”
WMS has a three-pronged approach to the online market, said Orrin Edidin, president & CEO, WMS Interactive. First, as a b-to-c supplier in the UK with JackpotParty.com; second, with new b-to-b initiatives, its first customer being the Partouche Group, which is the largest land-based operator in Europe, and for whom it will provide full turnkey services to run their online casino for them in Belgium; and on the game server integration side where, recognizing that systems integration was not its strong suit, WMS acquired a Stockholm-based Jadestone. “[Jadestone] is a best-in-class provider for multiplayer skill games but also subsystems integration, in that they will integrate their product into some of the largest online operators in the world,” Edidin said. “We realized that if we can integrate into their product, we automatically get access to large, experienced online operators throughout the world and exposure to their millions of players.”
“We’re a game house, and we see interactive is a medium; it’s a channel of distribution,” Edidin added. “I gave my first presentation on interactive gaming to the board on it in 1999. We started really turning up the heat in 2008 with the Jackpot Party casino, where we’re licensed in Alderney to serve the UK market and which went live in 2010. That experience has taught us an awful lot. We can successfully translate proven land-based content into the interactive space, specifically b-to-c online play-for-money concepts. Secondarily, we learned how to market to online slot players via the data and analytics that are critically important to manage that type of network. We also recognized where we had some gaps. It was never really the plan to be a b-to-c provider. That was more of a proof-of-concept exercise, which was natural for us to extend into the b-to-b space and to exponentially increase the awareness, exposure and the monetization of that content in broader markets.”
WMS is addressing the U.S. market as a b-to-b supplier of both managed services and game server integration for slot content. “As it relates to poker, one of the big lessons from our non-U.S. experience is that’s a unique skill set,” said Edidin. “There are some operators out there with decades of experience managing poker networks in legal jurisdictions, and they understand the dynamics of marketing, CRM and retention skills and the experience that goes along with that. So we decided, given the way the market is evolving and the financial models behind that in the U.S., that the best approach for us was to do an alliance, rather than an acquisition or thinking we could do it ourselves. We formed an alliance with 888, which is one of the largest and most established operators of legal poker networks in the world, and leverage their vast experience and very powerful analytic tools to help our land-based customers who desire to get into this space.
“It’s evolutionary; we take them on a natural sequence from building an online community through play-for-fun and social gaming, all the way through to play-for-money products, be it poker alone or poker and casino,” Edidin continued. “We are working with customers along these lines, be they in jurisdiction we know are about to legalize poker and/or casino to those who see it on the horizon or they want to begin building an online community of players that they can begin driving to their land-based casino. We are meeting with customers all over the country. It’s one thing for a Caesars, because they have the critical mass, to run their own poker network. It’s another for the single-site or Native American casinos who, without that liquidity, can’t sustain a successful poker network. They have to aggregate their player bases under their own brands. But we are working such properties to help them pool and aggregate their player bases so that they can compete with the big boys. That’s something that has to begin now. Obviously Nevada is further along, New Jersey is further along; we see progress in Delaware and a couple of other states. But the rest of the country, even if it doesn’t get legalized on the federal level, will have to get started as well.”
SOCIAL AND MOBILETwo other aspects of the emerging U.S. online market that warrant attention are the potential for social gaming companies to enter the market and the growing demand for mobile solutions to satisfy the preferences of younger players. The issues are not entirely unrelated.
“There’s a presupposition that brick-and-mortar brands will emerge as the winners or have tremendous brand value going forward; I’m not certain about that,” said Rittvo. “It could be companies that have a very significant presence on the Web right now, or a very strong presence on mobile, which could enable them to jump over brick-and-mortar operators.”
There’s mutual interest between social gaming companies that need to find new ways to monetize their business and brick-and-mortar operators who see non-traditional alliances as a shortcut to competitiveness in what promises to be a very crowded market. Rittvo noted that the California legislative process gave rise to such discussions. “A version of the California bill had no limit on the number of Internet licenses that were being offered, but the gatekeeper was a $30 million license fee,” he said. “There were several small tribes who reached out to us and said, ‘find us somebody,’ a partner who would pay the $30 million fee and we will begin to be their platform. That’s a model that I can see happening in a number of states. It would be easy to do in Nevada and California, given the number of casinos, and $30 million to have a platform in a market as large as California doesn’t seem to be out of line. Does it matter to a social gaming company if they’re aligned with a major player there? It’s not the tribal piece that will matter; it will be the heft of the overall marketing program.”
Edidin said WMS is positioned to compete regardless. “We are extremely encouraged by the experience we’ve had in the last several months in translating JackpotParty from the UK into the JackpotParty social casino on Facebook,” he said. “The growth has been nothing short of spectacular and its success gives us confidence that we understand the marketing analytics of that space and can compete in it. Does a Zynga have an advantage going in? Every time you can leverage the number of the players that they have and drive that traffic to a particular product, whether it be social or play-for-money, you absolutely have an advantage. At the end of the day though, it’s about the content and the game. Interactive is simply the channel of distribution. If the product isn’t good, you will not hold those players. If the game is great, you will not only hold those players, grow your player base, you will make a lot of money along the way. If you can successfully translate content from land-based to online and to social, you’ve got the makings of a successful model.”
One thing that’s already happening is the potential for online gaming in the U.S. has raised the profile and the need for mobile platforms among operators, Connelly said. “More people access the Internet in 2012 via handheld devices than via PC’s. We think very strongly that the online gaming world in the near future will not be accessed by home computer but by tablets and hand-held devices. A large portion of our offering and our back-end infrastructure has been designed to supply both native and HTML5 content on hand-held devices.”
Bally has approximately 60 casinos in the U.S. currently contracted with its mobile application, and its target is to exceed 100 in the next 18 months. “Our infrastructure, which is Cloud-based, offers more than 150 casino-sector features with the ability to play free-play casino content today, and with the intention of allowing those customers to move to geo-fenced mobile wagering in the coming months under the Nevada gaming regulations,” said Connelly. “If you’re a casino today, it is not enough to simply position yourself for the online world through a single point of distribution. There are multiple distribution channels you must utilize to attract players, such as mobile, Internet and social media. If you’re missing the hand-held infrastructure in your planning process, it’s potentially a significant mistake.”